China Opportunities

Negative sentiment is creating value in select investments in China, suggests Jim Oberweis, Jr., manager of the Oberweis China Opportunities Fund. Here, he discusses the state of the China market and highlights some favorite stocks.

Steven Halpern: Our guest today is Jim Oberweis, Jr., president of the Oberweis Funds. How are you doing today, Jim?

Jim Oberweis: Doing very well, thanks so much.

Steven Halpern: Our listeners are very familiar with your expertise in small-cap stocks and your excellent newsletter The Oberweis Report, but many might be less familiar with your expertise in China. Could you tell our listeners a little about the Oberweis China Opportunities Fund (OBCHX).

Jim Oberweis: Absolutely. Ten years ago we started out to apply the exact same process that we apply in the US in China and that was basically trying to find undervalued, small- and mid-cap stocks that were not widely followed, but where there was a significant gap between a company’s true earnings power and the way the market was valuing it.

There are just so many price inefficiencies in China. It was our first international opportunity because we saw much greater inefficiencies here in the US. These days, actually 80% to 90% of our assets under management are based outside of the United States, invested outside the US.

Steven Halpern: Now, as you mentioned, you started the fund in May 2005. Could you give us an overview of some of the changes you’ve seen over the last decade, and like, what you might expect over coming years?

Jim Oberweis: I sure can. We’ve seen some very significant changes. First, China has emerged away from an export driven economy, toward an economy of domestic consumption.

We’ve seen consolidation and fragmented marketplaces into market leadership, and often times, market dominance by a few players. We’ve seen the emergence of strong brands. We’ve seen massive growth in e-commerce and then we’ve seen the emergence of developed country citizen demands.

By that I’m talking about demands for healthcare, environment protection, and waste management, IT infrastructure, and desire for tourism. All of these trends are in their early stages. We expect them to accelerate in the years to come.

Steven Halpern: Now, you often travel to China as part of your work with the China Opportunities Fund, and on a recent trip, you pointed out that sentiment among equity investors was gloomy and distraught, yet you took a contrarian view and considered this pessimism to be a positive sign. Could you expand on that?

Jim Oberweis: Sure. If you look at the year-by-year returns of our fund, or the China market in general, you see massive fluctuations, anywhere from absolute giddiness with China, to total despair.

From my vantage point, from a math vantage point, despair has been a pretty good time to be investing in China. It’s when evaluations are low, that you’re most able to take advantage of disparities between true earnings power and market evaluations.

That is the time we’re at right now; maybe not quite as good as a month ago, but still really significantly undervalued.

Just to put it into context, the MSCI China trades for nine and a half times earnings. It’s about a 22% discount to its 10-year average.

In contrast, if you look at most markets in the world, including the US, most markets are trading at a significant premium to their historical averages. It’s one of the few marketplaces were seeing significant opportunities on evaluation basis.

Steven Halpern: Now, is this the type of market where you’d be comfortable suggesting that investors take a long-term view in terms of multiple years?

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Jim Oberweis: This is a market where I would invest in individual companies with a long-term view. I don’t think I would buy the Chinese market overall, but what we’ll try to do is to look and say okay, what’s still growing even if GDP were to continue to slow down.

That’s going to be areas like tourism, and travel, and healthcare, and environmental protection. Those same themes I think are going to continue. Growth is still robust in those sectors, even though the overall economy is certainly slowing.

Steven Halpern: To give our listeners an overview of the types of stocks you are looking at, could you walk us through some of the fund’s largest holdings?

Jim Oberweis: Sure. Let’s take Ctrip International (CTRP) as an example. It trades on NASDAQ. Ctrip is the dominant online travel player in China. Now historically there’s been three players; there’s eLong (LONG), Qunar Caymen Islands (QUNR) and Ctrip. People were bearish on this sector for really two reasons.

First, they saw a slowing economy with slow tourism demand in China, and two, they thought that the competition between those three players would just lead to irrational margin erosion. Both are proven wrong.

Tourism remains robust and the industry has consolidated. The guys who owned eLong and Qunar have sold major stakes to Ctrip, which is now creating price cooperation.

It also has some pretty significant players like Baidu (BIDU) and Priceline (PCLN) owning significant shares of Ctrip, we expect growth of 40% of revenues over 100% growth in earnings over the year to come, so that will be one name that we think is a dominant player with significant growth ahead of it.

On the other side of the coin we have companies like China Biologic Products (CBPO), which is a small-cap bio-pharma company.

They produce human plasma based pharmaceuticals in the People’s Republic of China. They’re benefitting from increased healthcare demand, as well as an again population and rising disposable income, and government reform.

They’re growing 20% in revenues, 30% in earnings, and shares trade for a little under 30 times estimates right now and has a market cap of about $3 billion US dollars.

Steven Halpern: Now, another one of your large holdings I believe is NetEase (NTES). What’s the attraction with that?

Jim Oberweis: NetEase has been a long time holding. It has done really well for us. The primary driver in NetEase has been evaluation. Our sentiment is solid on China.

The evaluation for some names, some names including NetEase that have historically had a pretty big cash position, as well as, you know, decent cash flow generation opportunities have been quite good.

NetEase has migrated from traditional desktop company to a mobile company and in doing so, has been able to expand margins and now it has grown into a very large company.

It’s probably kind of in its last stage for our fund because it’s pretty well followed. It has a $22 billion market cap and a 25 PE. This has been one of our success stories with a fund. We’ve owned it for many years, but we’re probably going to be looking for new ideas in the months to come.

Steven Halpern: Again, our guest is Jim Oberweis of the Oberweis China
Opportunities Fund. Thank you so much for your time today.